The Arbitration Alternative

1. The Arbitration Alternative Michael A. Jacobs Morrison & Foerster LLP October 29, 2007

2. The Arbitration Alternative • Get me out of U.S. courts! • I can’t afford U.S.-style discovery • I don’t want my case decided by a jury • I want a decision-maker who understands business • I want more privacy

3. The Arbitration Alternative • Arbitration’s long history in international commercial disputes • Arbitration clause is common feature in traditional international commercial contracts – but less common in “high-tech” license and distribution agreements • Advantages and disadvantages compared with litigation: • Specified forum and location • No public access • More choice over decision-maker • Much less complicated procedurally • BUT – typically no right to appeal • AND – tendency to “baby-split”

4. The Arbitration Alternative • Many companies frustrated by actual experience with arbitration • Lots of discovery • Expensive and time-consuming • Decisions not well reasoned • Why didn’t we just litigate? • Judges paid by the government and overloaded with work • Arbitrators paid by us – and the more work they do, the more they get paid • What to do?

5. Alternatives in arbitration • Choice of arbitral body • ICC – “traditional” choice in international commercial contracts • Historically slower and more expensive • Arbitrators typically from international arbitration network • American Arbitration Association • U.S. companies more accustomed • Arbitrators often practicing attorneys • JAMS (Judicial Arbitration and Mediation Service) • Former judges

6. Alternatives in arbitration • Number of arbitrators – 1 or 3? • Single most important choice in driving cost and time consumption • Very practical problems with 3-person panel • Scheduling • Expense • Time to render decisions • Little empirical evidence on quality of decision-making • My anecdotal experience: • As plaintiff – insist on a single arbitrator • As defendant – perhaps three is better

7. Alternatives in arbitration • Complexity of arbitration clause • All arbitral fora offer standard clauses • Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial [or other] Arbitration Rules [including the Optional Rules for Emergency Measures of Protection], and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction …. • But contracting parties often “design” the arbitration procedure • Qualifications of arbitrator • What issues are arbitrable • Pre-arbitration “alternative dispute resolution” • Detailed rules on discovery • Timetable for decision

8. Alternatives in arbitration • Problems with complex arbitration clause • Who will enforce the clause? • Compliance creates issues to raise in court • E.g., disputes about whether issues pled in arbitration fall within scope of complex arbitration clause • Hard to know who will benefit from specific provisions • Recommendation • Likely plaintiffs: keep it simple • Likely defendants: complexity is your ally

9. Alternatives in arbitration • Choice of arbitrator(s) • Most critical decision • Where litigation counsel proves its worth • Experienced litigators should have first- or second-hand experience with proposed arbitrator(s) • Choose an arbitrator with predelictions that give you a fighting chance with your case

10. Alternatives in arbitration • Attorneys fees clause • “American rule” – each side bears its own legal fees • “English rule” – prevailing party also recovers at least some attorneys fees • Contractual fee shifting enforced even under “American rule” • Fee shifting drives costs down and promotes cooperation among counsel

11. The Notal Case • Distributorship dispute • Notal is Israeli company that develops computer device for detecting age-related macular degeneration • Signs worldwide exclusive distributorship agreement with Carl Zeiss Meditec, worlds largest supplier of optical medical equipment • Agreement has “commercially reasonable” marketing obligations and minimum purchase requirements • Zeiss fails to make minimum purchases and breaches marketing obligation

12. The Notal Case • Arbitration clause • American Arbitration Association • Single arbitrator • San Francisco • Simple, broad arbitration clause • Arbitrator “may” award attorneys fees to the prevailing party • Chose experienced attorney/arbitrator as arbitrator in this case

13. The Notal Case • Result • Substantial “e-discovery” • Only half-day depositions of each side’s CEO • 4 day hearing, starting Friday and ending Tuesday • $10M award to Notal • Partial “baby split” • Includes $700K in attorneys fees • From initiation to payment, 9 months

14. The bottom line • Arbitration will probably be faster and cheaper than litigation if: • Simple arbitration clause • AAA or JAMS is arbitration administrator • Single arbitrator • Specified venue • Fee shifting clause • Arbitrator carefully chosen

15. Presentations and related articlesavailable on our Hebrew website www.mofo.co.ilEmail: israel@mofo.comThis week: 054-3077022